Asset allocation and location over the life cycle with investment-linked survival-contingent payouts

Wolfram J. Horneff, Raimond H. Maurer, Olivia Mitchell and Michael Z. Stamos

Journal of Banking & Finance, 2009, vol. 33, issue 9, 1688-1699

Abstract: This paper shows how survival-contingent investment-linked payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations. In exchange for illiquidity, these products provide the consumer with access to mutual-fund style portfolio choice, as well as the survival credit generated from pooling mortality risk. Our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival-contingent payouts over the lifetime, and also asset allocation paths, showing how to invest in stocks versus bonds. We show that the investor who moves her money out of liquid saving into survival-contingent assets gradually from middle age to retirement and beyond, will enhance her welfare by as much as 50%. The results are robust to the introduction of uninsurable consumption shocks in housing expenses, income flows during the worklife and retirement, sudden changes in health status, and medical expenses.

Keywords: Portfolio; choice; Household; finance; Life; annuities (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00074-0
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:9:p:1688-1699

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().